Wednesday, August 26, 2009

Baseball and Portland: Winner-Take-All Markets and Demand

I came across an interesting post on the Portland Architecture Blog (where I indulge my fantasy life as an architect) which muses whether Portland has grown beyond the minor leagues. The idea, in essence, is that Portlanders are no longer in minor league sports because we have become a major league city even without the major league teams. It is an interesting notion but it made me think about another aspect of the economics of sports.

Winner-take-all markets are those in which extremely small differences in ability can lead to humongous differences in rewards (compensation). These markets are usually characterized by reproducibility of effort. Popular music is one classic example. It used to be that musicians had to preform live and necessarily to a limited audience. So a slightly more talented musician may draw a few more people in the audience, but the differences were small. With high fidelity recordings, suddenly the market was virtually unlimited and a slightly more talented musician could sell perhaps millions more than a slightly less talented one.

Modern sport shares this same aspect. Now that sports have become a global media phenomenon it shares the reproducibility aspect in that sports performances can be beamed into billions of households around the world. What this means is that small differences in ability - the difference between being a major league level player and a AAA player - may be very small, but the rewards that go to the slightly more talented player may be ten, one hundred, one thousand times greater than the rewards to the slightly less talented one.

This is all well-known now thanks to Bob Frank of Cornell's Business School who (to my knowledge) coined the term. But what I wonder is how this translates to the demand for the goods whose markets are characterized by this winner-take-all aspect. [Perhaps this has been studied, but I am not aware of such studies] I wonder if consumers take short-cuts in deciding how to value such a product, and the short cut is that they make the assumption that these markets are efficient and if players are getting one hundred times the salaries, the product they are producing must be around one hundred times better. So it may be that the quality of the baseball played by the Beavers is just a tiny bit below the Mariners, but people look at the outsize salaries MLB players make and assume that the quality of the Mariners must be a lot better.

Now, even if true, this is only one difference that matters for demand. The modern major league ballpark is a far cry from PGE and offers a host of amenities not just the baseball, or as the Portland Architecture Blog wonders, maybe demand is wrapped up in self-image. But the baseball played on the fields is really not that different. So I wonder how reflexive is demand to the winner-take-all aspect of the market for players...

By the way, if this is true, what does it mean for MLS, where typical players don't make that much more than their USL counterparts?

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